• Masimba Holdings Limited warns of challenges in the construction industry amid drought and declining metal prices
  • Masimba's financial performance impacted by delayed payments and liquidity constraints, leading to decreased profitability
  • The outlook of construction

Harare- The construction industry is facing significant challenges, according to Masimba Holdings Limited, a leading construction company. In its latest financial results for the full year ended December 31, 2023, Masimba highlighted the ongoing threats to the industry. These include the adverse effects of El Nino-induced droughts and declining global metal prices.

The fiscal year of 2023/2024 has been marked by volatility, with recurring droughts and declining commodity prices worldwide due to El Nino and geopolitical tensions. This has led to a decline in Zimbabwe's foreign currency receipts for 2023, and major corporations like Zimplats are reducing their exports due to poor prices of precious metals.

Consequently, tax revenues will decrease, and the availability of foreign currency in the economy will also diminish as exports decline. This situation is exacerbated by the drought, which the President has declared a national disaster, requiring US$2 billion in humanitarian assistance.

For construction companies like Masimba, this means that the government, which is engaged in various infrastructure projects nationwide, will be compelled to divert or restrict its resources from construction to addressing the needs of the vulnerable population.

With diminishing export proceeds, the funding allocated to the construction industry will decrease significantly. Additionally, contracts with private entities will be affected by the scarcity of foreign currency within the economy.

However, Masimba has more concerns to contend with. Amid depreciating foreign currency reserves and metal reserves caused by the drought crisis, historical evidence suggests that the government will resort to increased money supply to mitigate the effects of the drought, leading to inflationary pressures and exchange rate volatility.

This poses a challenge for Masimba and other companies because they are paid by the government using the local currency, which rapidly loses value. Consequently, they will have limited working capital and reduced capacity for investments, as was observed during the drought seasons of 2007/2008 and 2018/2019.

Under such erratic economic conditions, the company must prioritize cost minimization by streamlining its operations and managing its workforce effectively. To navigate the volatile environment, Masimba and other construction companies must carefully manage their expenses, ensuring timely payment to employees.

Furthermore, it is crucial for companies to be attentive to payment arrangements. Given the uncertain future of the Zimbabwe Gold (ZiG) and the possibility of the government resorting to measures similar to the issuance of Bond Notes, payments in local currency should be made in a single transaction, either at the beginning or end of a project, to preserve value. The Bond Notes, which were initially backed by a US$200 million facility from Afreximbank, led to hyperinflation in July 2023 due to inconsistent monetary policies.

Additionally, priority should be given to projects paid in US dollars, as foreign currency sustains the financial stability of a company. While recognizing the importance of the local currency, businesses exist to generate profits, and it is crucial for companies to prioritize projects that contribute to their financial growth. Management should also explore alternative avenues for capital creation to facilitate business expansion.

Financial Performance

During the fiscal period, Masimba's revenue increased to US$53.8 million from US$49.8 million in 2022, representing an 8% growth compared to the previous year. This growth was attributed to a strong order book at the beginning of the year.

However, growth declined in the fourth quarter due to a conservative approach taken by the Group to align work execution with clients' payment patterns, according to Gregory Sebborn, the Group's chairperson.

Despite the increase in revenue, Earnings before Interest, Taxes, Depreciation, and Fair Value Adjustment (EBITDFVA) declined by 11% to US$12.6 million from US$14.2 million in 2022. This decline was caused by slow progress in the fourth quarter due to delayed payments and liquidity constraints, which negatively affected project efficiencies. The sub-optimal currency payment mix on many projects, which did not align with the increased dollarization of the economy, also impacted the Group's profitability.

The Group's total assets improved to US$85.8 million from US$63.3 million in 2022, primarily driven by the growth in contracts in progress and contracts receivables. This growth was a result of increased revenues and delayed payments from clients.

 

Cash generated from operating activities increased to US$5 million from US$0.8 million in 2022, and a significant portion of it was allocated to capital expenditure amounting to US$4.2 million (2022: US$4.7 million). The capital expenditure was primarily focused on meeting the demands of a growing order book.

The capital expenditure was funded through a combination of internal resources and borrowings. As a result, the Group's borrowings at the end of the financial period stood at US$1.9 million (2022: US$0.5 million), including a USD loan of US$1.4 million (2022: US$0.5 million).

Consequently, the Group's profitability decreased toUS$7.5 million from US$12.5 million.